Good day, and welcome to the Aqua America Q1 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Dingerdissen. Please go ahead, sir.

Thank you, Jim. Good morning, everyone, and thank you for joining us for Aqua America's first quarter 2017 earnings conference call. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at aquaamerica.com. The slides that we will be referencing can be found on our website. There will also be a Webcast of this event available on our site. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is posted in the Investor Relations section of the company's website. Presenting today is Chris Franklin, Aqua America's Chief Executive Officer; and Dave Smeltzer, the Company's Chief Financial Officer. After the presentation, we will open the call for questions. At this time, I'd like to pass it over to Chris Franklin.

Thanks, Brian, and thank you all for joining us today. I know it's a busy day so let's get right to it. I'll start with a quick update on the Company and then comment on some of our highlights from the quarter. And that will include customer growth, work we've been doing. Then Dave will comment on the Company's financial results, including rate activity, then we'll conclude the formal part of the presentation by recapping our guidance for the year, and then take any questions you might have. By now you've seen our release, and we started the year with a pretty solid quarter. Mild winter this year allowed us to get our capital program really in gear and into a strong start and pulling nearly $95 million in projects with our wastewater and water division just in the first quarter. We also continue to educate and brief elected officials on the benefit of fair market value legislation. And I've said this before, and I'll say it one more time, we'd like to see this legislation spread throughout our footprint and beyond. Sort of like the DISC did in the 1990s and into the early 2000s, because we think it's a significant contributor to our ability – the industry's ability to grow. Both our capital program and our growth program remain among our highest priority. As we work on our growth program, brand awareness becomes increasingly important. And I put this photo in here to demonstrate how our brand awareness is important, this is in Aqua Illinois, in our Kankakee key area, where the treatment plant was selected as the best tasting water in the south suburbs of Chicago by the South Suburban Waterworks Association in both 2016 and 2017, which is nice recognition for the team out there and…

Yes. Thanks, Chris, and good morning, everyone. Today, I'll review the financial results for the quarter and discuss some of the key driving factors that have impacted the Company’s performance. Also provide a look at our rate activity for the current year thus far. So we reported revenue of $187.8 million, as Chris mentioned, down 2.5% from the $192.6 million in 2016. Our Regulated segment actually reported revenues that were up for the year, $186.3 million compared to the $186 million in 2016. I'll show the waterfall chart in a moment, but when we look at Q1 2017 versus Q1 2016, it increased in revenue from rate surcharges and the regulated growth was offset by the reduced revenue in the market-based activities and the lower consumption in our first quarter of 2017. O&M expenses were down 6% to $69.1 million for the first quarter of 2017, compared to $73.5 million in the same period of 2016, mostly as the result of expenses that were associated with our former market-based activities. For our Regulated segment, operations and maintenance expenses increased, but only slightly, by about $200,000. We reported net income of $49.1 million or $0.28 per share, compared to the $51.7 million or $0.29 per share, reported in Q1 2016. So clearly, our Q1 results were below last year. In Q1 2016, it's important to note we had a gain on a water asset sale, as well as a couple of smaller items that did not reoccur in Q1 2017. And I'll go over these items when we get to the waterfall slide. Importantly, we are still very comfortable and on track with the full year projections and the guidance that we've provided. So looking at the different components of the 2.5% revenue decrease, we'll start with the increasing components. Rate…

Thanks, Dave. I'll wrap up with the last slide and reaffirm our 2017 guidance. We expect our full year earnings per share to be in the range of $1.34 to $1.39. As always, we remain laser focused on our O&M expenses. Rick Fox and his team continue to do a terrific job in delivering O&M. We expect to invest more than $450 million in infrastructure improvements this year, 2017. It's a record amount for us, and more than $1.2 billion of CapEx over the next three years through 2019, which will improve and strengthen the already strong infrastructure we have and the existing systems that we own. These investments allow us to provide the high level of service to our customers throughout our footprint. We expect to spend additional capital and make improvements in newly acquired systems. Again, this is encaptured in the $1.2 billion of the CapEx budget. That would be additional CapEx on top of $1.2 billion. We expect rate base to grow approximately 6% to 7% regarding our Pennsylvania rate activity. As we've said previously and we're going to say it with our current path, which is to file a distribution system improvement charge, otherwise known as a DSIC in 2017, this year, followed by a full rate filing likely in next year, 2018, and we expect the resolution of that case in 2019. And Lastly, as I mentioned earlier in the presentation, we expect our year-over-year growth and customer headcount to be in the range of 1.5% to 2%. So before we end the call, let me open it up and see if any of you have questions that we could help you with.

[Operator Instructions] We'll take our first question from David Katter from Baird.

Good morning guys, thank you for taking the question. I wanted to ask about the cadence of capital investment. So $95 million in the first quarter, a little bit shy of $450 million run rate. How should we expect the cadence of spend over the rest of the year?

Yes, we – it depends on the type of projects often and when we can close them. But we do expect to land the year right on target. And at, with at least $450 million. So it seems that which close those projects, Dave, might be – imperfect, but we're right on target for the year.

Got it. And then one more question. We saw recently headlines about lead levels in Pittsburgh. And I was wondering how much do these headlines in Pittsburgh or Flint actually material – materially alter the acquisition landscape. I mean, do you see municipalities actively looking at this and saying, we're interested in doing business?

It's a great question. As the Wall Street Journal article, I think, summarized the issues pretty well. And I would say this, I would say there are 3 primary drivers that I think, or we hear from municipal leaders. One is certainly this post-Flint Michigan issue, which really revolves around lead, lead services, lead in the system. The second one is around, the congress is in discussion about infrastructure. That's been a national conversation and we've been waiting to see what the outcome of the infrastructure is going to be. And third and finally, I think it is a fair value legislation that we get asked a lot of questions about, what's my system work today, what we'll be working for. And so, I think combined those three items, we hear a lot from the municipal that we're talking with. They just want to know more about it.

No, I think there is a general nervousness in the, I'll call it the municipal market of -- especially small, larger ones less nervous. But if you are a smaller municipal with less resources, they are more nervous about where they are on the lead issue.

Excellent thank you guys.

[Operator Instructions] Moving on, we'll take the next question from Ryan Connors of Boenning and Scattergood.

Great thank you. Question for, I guess, for Dave, really. Regarding to the tax rate, Dave, seems like you had said just a couple of years back that the general idea was that the tax rate would gradually creep upward and then once it got to a more normalized level, that would kind of signal when – it would be a pretty good indicator of when you'd be going in to go for a base rate case in Pennsylvania. But it seems like, I know you had the one-time tax gain here, but it seems like that tax rate just continues to be pretty low and that upward creep has been slower than, I guess, we had maybe expected. So can you just give us some color about why that is and what the dynamics are? That are keeping that at such a reasonable level.

Yes, sure, Ryan. We – first let me just clarify, we never really expected the tax rate to reach a normalized level at a reasonable amount of time. In fact, it has always been our expectation that the tax rate will be below statutory for a very long time, thus creating very significant savings to pass on to our customers in addition to the savings they've already achieved in the last seven years by the fact that we've installed over $1 billion of property and not raised rate. So that's really been our expectation, so I apologize if we're off base with you on that.

Yes. Well, maybe normalized is the wrong word, but a higher level.

Yes. So yes, when you look at it, just assuming you spend the same amount every year, then certainly the concept would be correct that we would see a gradual increase in the tax rate. We wanted to create a situation whereby we stayed out of rate as long as we can and really created additional benefits for our customers. And so we have seen a slight increase in spending during this period to maintain that lower tax rate and stay out till our expectation of a DISC later this year and a rate filing next year. So as time has gone on, we perhaps have managed it a little bit more than in the early years to create those benefits, but that's really the result of that management.

Got it. Okay, that makes sense. And then a question on, Chris, you mentioned a fair market value legislation and the fact that you'd like to see that spread like DSIC did. But all these legislations aren't exactly created equal. So can you just talk to us about some of the points of variability between what the various states are doing and have done? And which state you think that's got it most right at this point and why?

Yes, absolutely. Listen, I give a lot of credit to the Illinois legislature, they were the first. I think the corrections for the improvements, that will made in Illinois, that were made in Pennsylvania, when in the past here last year, were around the size of limitation, I think it's a limit to 7,500 customers. So therefore, larger systems can't take advantage of the same grade value. There are other technical improvements made in Pennsylvania, but I would say that Pennsylvania is probably the model at this point, there is no size limit, no cap. And I know as we look at other states, they will make alterations to make their commissions feel as comfortable as possible. Because at the end of the day, when the appraisers are finished in turning in their reports, then those are rate-based, and that's defining for what rate base in, ultimately is in the case in the acquisition. So I think commissioners in each state will comfortable with that. They call the bulk discretional legislature. But really we all want to work together very collaboratively to make everybody comfortable. But I guess the short answer is, Pennsylvania probably has it most, right? Now when you look at some states uptick Virginia. Virginia, essentially a purchase price equals rate base today, and I think as long as the judges in Virginia believe that's a fair process, and we do as well. I think that works, I guess if it got out of wack then there would be an adjustment. But that, it's a very straightforward process. I guess, what I would say is the downside about that is, you don't know until you get your decision. Where in Pennsylvania and Illinois, your have certainty once that appraisal is done, you know what your rate base is going to be.

Yes, that was excellent color. Last question. Big picture in nature, but I just want to get your take on this. There has been talk about, I guess with the new Federal tax plan or tax bill that the municipal bonds tax exemption – not tax exemption, interest income exemption would be, maybe the decreased or eliminated in order to create a flat personal tax system. And if that was compromised municipal systems, wastewater systems the ability to finance themselves, at least in terms of cost of capital, which, I guess what in theory be a positive driver for your business. So can you give us your take on that issue? Whether you've heard that or you think it's likely or what the impacts could be for you and the industry?

It's still hard for us to speculate on probability of those things as you know. But I will say that's a new talking point for our discussion with our municipal brethren in helping them out. But as you know, Ryan, it's really difficult to speculate on so much, I haven't heard enough about it to say whether it's real or not.

Okay, fair enough. Thanks a lot.

You bet. Thank you.

Moving on, we'll take our next question from Angieszka Storozynski from Macquarie.

Fantastic thank you. So first about those four pending municipal acquisitions. So you haven't announced these acquisitions, but you have quantified the amount, you will be paying. So I mean, you must have already reached an agreement. So what's the stage of these acquisitions and what's the likelihood of them coming through, again, given that you're already showing the amount?

So they are at various stages. One of them has been submitted to the PUC here in Maine. I'm sorry, in Pennsylvania, just here in May. So the other one, we expect the PUC decision to come out in June. Another one, we're still negotiating the asset purchase agreement. So they are in various stages, but none of them have reached the total right, another one is expected to close here in June. And so we should be close on some of them to announcement, but we just haven't done so, given the various stages they are with ...

And those submissions to the Pennsylvania commission, are those public?

Yes.

Okay. And then, again, on the Pennsylvania regulatory issue. So okay, so you have a pretty strong CapEx year, this year. I understand that a lot of the CapEx increase is associated with Pennsylvania. How should we think about it? So on the back of the rate case, should we expect that there is going to be an increase versus currently observable levels to your CapEx deployment in Pennsylvania past the rate case? Because otherwise, I'm a little bit struggling how I could see in my earnings a growth meeting my rate base growth, because I mean, you're showing a couple of years of projections of CapEx. It looks like this is a peak year of CapEx. Then it kind of decelerates. I'm already earning, my allowed ROE is not more on the asset base in Pennsylvania. So where would the growth in earnings come from on the back of the Pennsylvania rate case?

Yes. I mean, it's is a great question. One that gives us three year guidance period we're projecting it through 2019. We're are going to spend $1.2 billion. Now what could have a think about that, right? We certainly have not run out of pipes to replace in Pennsylvania. And I would say additionally, Pennsylvania is probably one of the most active opportunities to acquire systems and then spend CapEx on fixing those. So the enhancement of our ability to spend capital even beyond our base CapEx program here over the next four, five years or beyond, we'll have a lot to do with how much the growth we have. And I think we're starting to see and what we've communicated to The Street is that we see larger opportunities in front of us and you can already see in our 2017 deals, municipal deals, those deals have started to become larger. And as new larger deals and they require more CapEx, there is more opportunity there. That's probably about as much guidance as I can give you on CapEx.

So basically the growth in CapEx is a function of M&A and not the existing operations.

Let's be clear. What I said was, we have not run out of pipes in Pennsylvania, beyond the three year opportunity to spend the money on pipes, beyond the 3 years that were of guidance. So enhancing beyond that three years, enhancing our ability to spend CapEx with the municipal M&A work.

Okay, thank you.

[Operator Instructions] Moving on, we'll take our next question from Spencer Joyce from Hilliard Lyons.

Hey Chris, Dave good morning guys.

Hey Spencer.

Just one, hopefully pretty quick and simple question from me. Dave, can you refresh us kind of the timeframe that we exited some of those market-based businesses last year? I'm just – from a revenue modeling standpoint, I guess, minus $5 million or so in Q1. Just want to kind of understand when we'll start to see that tail off a little bit, just as far as comparisons go.

Well, yes. We've been exiting them in various time frames over the last 24 sorry no, 15 months, 16 months. And we exited some last year starting in May, and really had continued and exited one just in January of this year, with the exit of our largest business being in the middle there in December of 2016. So they really were the primary exit point for our business with December being the exit of our business that had about a $30 million revenue of run rate in the first year. So that's about where we are. We have very little left to exit and I think, by the end of the next quarter, we'll probably be where we want to be.

Okay, perfect. So from a modeling standpoint, we'll see a couple of quarters at least that skew a little higher than the $5 million or so of drawdown in Q1. Just kind of based on seasonality and as you said, the big exit in the fourth quarter last year.

Right. Yes, that's reasonable.

Okay, perfect thanks guys. That is all I had.

And at this time, I'll turn things back over to Chris Franklin for any additional or closing remarks.

Thank you all for joining us today. I appreciate your thoughtful questions and your time. I know you're all busy and let's go at this point. Thanks so much.